By Mike Jones
NZD
Monetary policy expectations dictated relative currency performance last week.
Less dovish-than-expected missives from the RBNZ, Bank of Canada, and the RBA saw the NZD, CAD, and AUD finish the week 1st, 2nd and 3rd respectively in the weekly performance rankings.
In contrast, hints from the ECB that a rate cut is being considered saw the EUR slip to the bottom.
So, while the NZD/USD finished the week near the top of the 0.8080-0.8350 range, it was the NZD/EUR that really shot the lights out, soaring 2% to around 0.6450.
For this week, central banks remain in focus. In particular, we expect the Federal Reserve to introduce yet another asset purchase scheme on Wednesday, as its ‘Operation Twist’ programme rolls off (see Majors).
A result in line with our expectation would likely maintain downward pressure on US bond yields and the USD, thereby keeping the NZD/USD supported through a positive yield differential.
Notably, NZ-US 3-year swap differentials rose from 225bps to almost 240bps last week.
For NZ, it’s mainly second tier data on the calendar this week. Through all the bits and bobs, a cautious recovery theme is expected to prevail. We’re looking for a 0.5% gain from Tuesday’s electronic card transactions data, and QVNZ and REINZ housing reports are likely to show the housing upturn gaining momentum.
Friday’s ANZ-RM consumer sentiment index should maintain a reasonable pulse and we are hopeful the BNZ PMI can hold around the 50.5 level it got back up to in October.
It’s worth noting, last week we revised up our NZD/USD forecasts for the second half of 2013. Our end-2013 forecast has been lifted from 0.7800 to 0.8100. This reflects 1) the recent improvement in the global backdrop and above-trend forecasts for NZ’s trading partner growth, 2) our expectation NZ commodity prices will keep trending higher in 2013, and 3) the recent downgrade of US growth forecasts owing to the ‘fiscal cliff’.
In the short-term, the key level to watch is 0.8360. This level has capped the NZD/USD since March.
While speculative ‘long’ positioning looks increasingly stretched, NZD/USD momentum is positive and NZ-US relativities are still tilted in favour of NZD appreciation.
If we did see a break of 0.8360, the 2012 high of 0.8471 would then pose the next resistance challenge.
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Majors
The reaction to Friday’s surprisingly strong US non-farm payrolls report (146k jobs added vs. 85k expected) was relatively subdued. Equities and ‘risk-sensitive’ currencies ground higher, but in fairly unconvincing fashion. The S&P500 closed up 0.3% for the night.
The unconvincing reaction suggests either a) investors saw something they didn’t like in the data, or b) the market was already ‘long risk’ going into the data release. We suspect there was a bit of both at play.
There were downward revisions to the historic payrolls data and a lower participation rate contributed to the drop in the US unemployment rate (to 7.7%). Meanwhile, the latest IMM speculative positioning data shows long positions in the ‘pro-risk’ AUD and NZD are now close to extreme levels.
The weekend’s news should help carry Friday’s positive tone over to the new week. Not only did the Greek government say the €30b Greek debt buy-back (part of the process towards obtaining bailout cash) is on track, but Sunday’s Chinese retail and industrial production data confirmed the Chinese growth rebound continued in November (rising to 8-month highs).
For the week ahead, the focus is likely to remain in the US. First, on the fiscal cliff. Weekend reports suggest Republicans and Democrats have made little progress on reaching a compromise to avoid the cliff.
Still, there has been little fallout on markets to date, suggesting investors remain optimistic a last minute deal can be reached. Headlines or news that threatens this optimistic view could dent risk appetite and underpin the USD.
Second, Wednesday morning’s FOMC meeting. We expect Operation Twist to be replaced with between US$25-45b of outright Treasury purchases per month (along with continued buying of MBS).
This is close enough to the consensus expectation but would still be enough to maintain downward pressure on the USD, in our view. Notably, our model suggests momentum is working against the USD.
The model is short the USD against all of the major currencies, with the exception of the JPY.
Other News:
* Italian PM Monti says he will resign as soon as parliament has passed the 2013 budget.
* The German Bundesbank slashes its German 2013 growth forecast to 0.4%, from 1.6% in June.
* ECB’s Makuch suggests an ECB rate cut next year is likely unless economic conditions improve.
Event Calendar:
10 December: NZ manufacturing activity; JN GDP, CH trade balance; EU French IP;
11 December: NZ electronic cards transactions; AU NAB business confidence; EU German ZEW; UK BoE’s King speaks; US trade balance;
12 December: AU consumer confidence; AU RBA’s Stevens speaks in Bangkok; EU German CPI; UK ILO unemployment EU Eurozone IP; UK BoE’s Dales speaks; US FOMC decision;
13 December: NZ PMI; US PPIs; US retail sales; US jobless claims;
14 December: JN Tankan; CH HSBC flash PMI; EU PMIs; US CPI.
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